Consider the Source

A Contrarian View on Outsourcing Gets it Wrong

A recent column by Jim Jubak published on MSN Money, "Why fewer U.S. jobs are going overseas," postulated that there will be deceleration of the rate at which U.S. jobs are being exported via outsourcing, attributing that outcome to “crisis in global logistics,” meaning the problem of transitioning work from here to there. It was an eyebrow-raising piece, captivating in its contrarian view. But it was also flat wrong, perhaps because it failed to understand what's behind outsourcing.

The primary motivation for “moving jobs offshore” isn’t really about squeezing the working class for a few dollars per hour. Sure, the benefits of labor-cost savings are real and substantial, but most corporate executives recognize that the global labor tide will equalize in time as the worldwide service economy becomes ever more interconnected. The facts that truly are driving most progressive strategies for outsourcing and offshoring are the demographic reality of aging workforces in Western economies, stressed educational infrastructures and the emerging wealth of emerging countries.

Mr. Jubak draws the conclusion that offshoring will take a pause as companies reconsider the costs and benefits and then proceed at a slower and more cautious pace as CEOs try to make sure that they are saving money -- and not dooming their company to endless problems with unhappy customers -- when they send jobs offshore.

That view simply underestimates the sophistication of corporate and government leaders who are creating a robust network of global services that transcend the relatively pedestrian issues of work transition. It also fails to note the intellectual capacity of some very formidable companies.

Perhaps most damning to the article's credibility is its operating premise that the biggest period of sourcing is behind us, and that companies aren't looking for sourcing solutions as much as they had in the past. I can tell you from practical experience that this view could not be further from the truth.

Just as there isn't a one-size-fits-all solution for companies looking to streamline operations, reduce costs or better manage operations, smart executives -- and there are still plenty of them out there -- don't pursue sourcing solutions solely for immediate financial gratification. The notion that sourcing strategies are driven entirely by gaining access to cheaper labor really misses the size of the wave approaching.

It’s about positioning for access to the labor force of the next era and helping to help develop the markets for tomorrow’s products and services.

It's not about moving jobs, but it is about increasing capacity: A globally interconnected ecosystem of service centers, universities, cooperative government policies and progressive corporate leaders is evolving to serve the ambitions of many of the world’s largest and most significant companies. 

When One is the Right Number: Fast Outsourcing Agreements With a Single Provider

When time is precious, such as during the heat of a merger or divestiture, there's often a temptation to grasp quick solutions to even the most complex challenges. It's often the case that decision makers face make-versus-buy considerations when evaluating how to handle back-office services such as IT, HR, and finance. The question becomes: Can we contract for services quickly to ensure orderly achievement of critical business functions without having to go through a long process of competitive solicitations?

The answer is an unequivocal “yes.” There are certainly techniques to rapidly contract for essential business services with a single provider of choice. But then the question becomes: Is that the right response for a specific situation? It obviously depends on a range of factors, including the existence of a prior/current services relationship, the market-worthiness of the proposed commercial terms, the level of oversight in the proposed relationship and whether or not there are considerations that might present the perception of conflicts.

It’s been proven often in the outsourcing industry that “time kills deals.” A reasonable corollary is that “lack of time kills competition.” Because no one wants to overpay or find that the contracted services are substandard, we advise clients who are thinking about an accelerated transaction with a single candidate provider to get organized early on and take advantage of the best market intelligence to quickly nail down things such as contracting terms, pricing and service delivery integration.

There are many reasons why a sole-source transaction might be the right answer. Yet there are equally many pitfalls to circumventing the competitive process. Ultimately, it's a business decision that comes down to a risk/reward tradeoff based on good due diligence.

2006 Nugget – HRO Market Concerns

Many people are asking me what the big sourcing stories of 2006 were. Rather than discuss the obvious – like huge profits for service providers in India - I enjoy talking about the less-prominent developments, which may well become the big stories of 2007.

Here’s one such development: The slowdown in companies opting to send their human-resource operations offshore was caused by a host of factors, and the problems plaguing so-called HR outsourcing (HRO) may not get better anytime soon. In fact, they could get worse, and the wholesale outsourcing of HR departments could be on hold for the near term.

The culprits behind the HRO slowdown include management changes at Hewitt (the market leader); the well-publicized earnings problems of a few notable providers and the failure of several providers to provide good service on large deals they’ve done in the past.

Management changes are a matter of course for any business, and Hewitt handled its management changes well. They wouldn’t even be noteworthy except they seemed to contribute to taking the company off its torrid pace from the prior year, 2005, when Hewitt won almost 30 percent of the HR contracts awarded globally. Some clients seemed concerned about the HR outsourcing business model when Hewitt’s new leadership acknowledged having some hard choices ahead.

Elsewhere, another provider, ACS, has admitted to “growing pains” and has also taken accounting charges on two of its HR contracts. And Convergys is still struggling to achieve the scale required to leverage its solution. While it is difficult to assess just how EDS (ExcellerateHRO), Accenture and IBM have performed financially, we can make a rough estimate of how much business they’ve won. The answer is: probably less than they’d hoped.

Some of the challenges the HR business faces today are the result of an immature market: providers that over-commit and clients that under-weigh the changes required for substantial benefits through outsourcing. Some are also attributed to poorly designed deals.  Some are just related to poor execution.

Are the HRO industry’s issues really going to be solved by greater volume? We don’t think so.

Instead, the market is already showing a bit of retrenchment, with clients opting to contract for discrete parts of their HR functions, such as recruiting, payroll, or training. The market appetite for wholesale HRO relationships seems to have waned a bit, opting to wait out the service delivery issues that are affecting several of the leading providers.

This situation may be the proverbial self-fulfilling prophesy: If the providers require scale to grow out of their problems, and clients are unwilling to sign up until the problems are settled, we’re in a deadly embrace.

The industry’s biggest deal of 2006, Unilever’s award to Accenture, may be the critical relationship to watch. If Accenture can show that the demanding needs of a company like Unilever can be met, perhaps there’s a way forward for others through large-scale HRO. In the mean time, look for greater use of function-specific sourcing within the HR domain.

Late to the Game of Offshoring? Take a Look at “Virtual Captive” Operations

In many industries, if you aren’t taking advantage of offshore resources for certain business operations, you’re already behind your competitors. I’m not talking about manufacturing operations that go offshore to produce goods. Rather, I’m talking about business services – the processes that allow your company to acquire, process, interpret, and report information.

The rapid pace of adopting offshore delivery models for services ranging from research and engineering to financial operations to human resources and information technology services is well documented. To date, companies that succeeded in using offshore talent either outsourced to a third-party service provider or relied on “captive” centers. But there’s a third way, so-called virtual captive centers, that could prove the path to the future. I’ll discuss those in a moment.

Captive centers are dedicated to the needs of a particular client. They may be owned and operated entirely by client employees, or they may leverage the local marketplace for contracted staff, but the economic leverage is the labor rate for the staff dedicated to the operations of a single client.

Outsourcing promises leverage across more than just labor costs. The outsourcing business model accrues benefits to the client through leverage of facilities, capital, management talent, research, and a host of other tangible assets.

I should acknowledge that a hybrid of the two has existed in many of the emerging destinations, and fueled much of its growth: That’s labor-arbitrage contracting in which the people performing the work are provided by a third party, but the design and execution of the work itself is largely a responsibility retained by the client. This may not be evident on the surface, but check into the remedies and responsibilities for problems and you’ll see who is accountable.

We’ve recently seen an interest in virtual captive solutions. To explain by example: A short time ago we helped a large U.S. bank establish a very ambitious operation in India that operates much like a joint venture but benefits from a partnership with an established outsourcing service provider. Management responsibility is shared, while the resourcing models largely leverage the established presence of the service provider.

For companies that are late to the game of offshoring, going the route of a virtual captive provides the potential to achieving scale and results much faster.